Governance

Public shareholder has limited influence on public service corporations

May 13, 2015

Although public ownership of shares is a common instrument to safeguard the public interest in public service corporations, this form of security has a number of drawbacks. That is why Distinguished Professor Michiel Boersma advised in his inaugural speech called “Public service corporations, quo vadis?" against the ownership of shares by the government.

Image: © Nationale Beeldbank

"The so-called weakened structure regime exists in almost all the public service corporations where government, provinces, or municipalities own one hundred percent of the shares," says Boersma. In its 2013 State Holdings memorandum, the government explains its preference for this regime by saying that it wants to be able to influence the company's strategy, take part in deciding on major investments, and appoint directors and commissioners. The remuneration policy is also an important reason for wanting to exert influence. 

Boersma believes there are three reasons why share ownership by the state is problematic. First, it limits the influence of the shareholder on policy, strategy, and operational management of the company. “That is because state holdings typically are companies with a statutory two-tier status. "If there is a public need to effectively influence the company's strategy and policy, then laws and regulations, combined with a structure that is under the direct responsibility of the responsible minister, would be more effective instruments to safeguard public interests."

In addition, the government often does not have the relevant knowledge or experience to make a real contribution to the company's decision-making. “This is even more evident in the case of local authorities, because strategic interests are even less of an issue there and they often lack the necessary skills to actively shape the public ownership of shares." The last argument is that possible role conflicts undermine balanced decision-making, which can soon put the company at the mercy of public opinion and the political decision-making process. 

Radical and disruptive changes are taking place in the telecommunications and energy sectors, says Boersma. These changes have a profound effect on the control over and hence the governance of the companies operating in these sectors. "This is a task for further research. The energy sector then wants to know who will have to take the lead in the transition to a sustainable energy system: the network companies, commercial power companies, the prosumers, the government, or several stakeholders together. In the latter case, however, the key question remains of how these stakeholders will work together and what role the government will play in the energy transition."

About the Chair of Corporate Governance of (former) Public Service Corporations

The Chair of Corporate Governance of (former) Public Service Corporations is made possible by Enexis, Essent, and Gasunie. This chair will focus on the corporate governance of (former) public services corporations with a particular focus on the practical problems encountered by employees, directors, supervisors, and shareholders of these companies.

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Inaugural speech “Public service corporations, quo vadis?”, by Michiel Boersma (2015, in Dutch)

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